Within the Inland Empire's commercial real estate market, retailaccounts for the most significant amount of distress, as manydevelopers built ahead of rooftops that now sit largely vacant orfailed to materialize altogether. Furthermore, investment activityintensified dramatically from 2005 to 2007, a period when priceswere at or near peak levels, high leverage loans were commonplaceand underwriting criteria was most lax.

More than half of the outstanding CMBS debt in the Inland Empiremarket is backed by retail properties, and about three-quarters ofthis debt was originated between 2005 and 2007. In the CMBSsegment, foreclosures/REOs are more typical than modifications andextensions in the Inland Empire retail sector. Given thesignificant number of delinquent CMBS retail loans in the market,more discounted assets are likely to become available to investorsthis year.

The local housing downturn will continue to adversely impact theInland Empire apartment market this year, though operationalperformance will vary significantly by location. A glut offoreclosed single - family homes have flooded the market in recentyears, and investors have turned many of these properties intorentals. Competition from discounted shadow rentals has beenespecially strong in the Southwest Riverside County, Perris andPalm Springs/Palm Desert sub markets, areas that also account foroutsized shares of apartment distress.

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